Week in brief: Week of May 5

May 10, 2017

This month, the investment proverb teaches, "Sell in May and go away." Which, like most proverbs, has some historical logic. But not nearly enough to follow in the literal sense. As summer equity returns have been consistently positive over longer periods of time. Especially when already trending higher as the season begins. Like this year.
Last week? Equities drifted higher. Largely on solid Q1 earnings. With more than 80 percent of S&P 500 companies having posted results, the nation's corporate profit engines are humming. Even while many suggest that equities have become overvalued, strong earnings growth helped justify record highs. Further suggesting that this bull has legs.

Earnings increased 13.5 percent year over year. Easily beating estimates of nine percent growth. The third consecutive quarter of year-over-year growth. And the fastest pace since Q3 2011.
Importantly, growth has been broad-based. With energy, financials and technology leading the way. Ten of the S&P 500's 11 sectors posted earnings growth. With only telecom lagging behind.
And a tip of the cap to the Old World. As expectations of a market-friendly outcome to Europe's ongoing political travails only added to the rally's buoyancy.
After fighting each other in the last century's two global conflagrations, France and Germany have since represented the linchpin partnership that binds the EU. After France's preliminary April 22nd election, that partnership risked dissolution.
The first-round of France's presidential election brought the forces of democratic nationalism and centralized elitism together in a head-on collision. Much as they have in Great Britain and the U.S.
Independent centrist Emmanuel Macron and far-right leader Marine Le Pen received the most votes. Leading to a runoff vote that occurred Sunday. The vote was the first in decades featuring neither of France's major political parties.
Imagine the GOP and Democrats being shut out of an American presidential contest? Sounds rather appetizing...
Ultimately, Macron -- the favorite -- was victorious. Which is why equities -- ever the fans of centrist options -- rallied strongly last week. Diminishing political risk is a bullish sign for European stocks. Which we've recently been advocating. Enhancing our allocation to European stocks (hedged for currency imbalances) since the beginning of the year. Of course, we made a similar call last year. And found ourselves a bit early.
Last week revealed how far Europe's electorate has strayed from the establishment. As right-wing candidate Marine Le Pen exceeded all expectations. And the French public's displeasure with the status quo was writ large. That said, we figured Macron would pull off a victory. As France, long the uber-euro state, has too long and too enthusiastically backed the EU to simply throw in the towel now.
Regardless, years of European-stock underperformance now provides a mean-reversion opportunity. As the S&P 500 and the European indexes could potential swap leadership roles. The potential for which analysis supports. As Europe's political risks have been priced into equities. The ECB considers tapering its stimulus programs. Valuation differentials between European and U.S. equities now stand in marked contrast. And, unexpectedly, the European economy appears to be growing more quickly than that of the U.S.
To all of that, add the idea that volatility in European equities recently incurred its biggest one-day drop in years. Declining 40 percent on Monday, April 24th. Suggesting a complete abandonment of European risk aversion.
Pour queue le bonhomie?
Investors placed a colossal bet that Macron would prevail in this weekend's runoff. And while the polls have not been exactly sine qua non in the outcomes of recent elections, the market usually gets it right. And the market said that Macron would emerge victorious.
Had Macron's candidacy fallen apart? Then the iron dice would have rolled. Leading volatility to return with the vengeance of a scorned king. And dampening our enthusiasm for European stocks.
In D.C.'s political swamps, there was much ado about everything.
Congress succeeded in its second attempt to pass a repeal-and-replace plan for the Affordable Care Act. The bill now moves to the Senate. Where it will be amended like a third-grade book report before being returned to the House.
Congress also reached a budget deal to fund the government through September. And President Trump is pushing a tax plan than features a simplified three-bracket system. And a 15-percent corporate income-tax rate. That stands in stark contrast to today's 35-percent taxation rate. Critics inveigh that the plan looks past traditional GOP concerns. Nor, they claim, would the plan help the nation's bloated budget deficit.
Of course, as we argue below, you can't save your way to prosperity. Growth remains the sole antidote.
Also, The White House briefed the U.N. Security Council and the Senate on North Korea last week. Marking, perhaps, a harbinger of things to come. As North Korea represents an unstable situation with no ready-made solutions.
Moreover, the South Korean presidential race features an appeasement candidate who would grant a number of concessions to the North. Enabling Kim Jun-Un to complete his nuclear ambitions while relieving some of the building pressures that might have forced him to work with the international community. Were North Korea relieved of its social and economic pressures, the West would be left with two choices: military action or the acceptance of North Korea as a nuclear power. Neither being palatable to anyone.
These days, one must have one's head on a swivel to stay atop of the news flow. But keep two things in mind.
First, the media exists in a constant state of overreaction. And rarely focuses on news that's could impact your portfolio.
Second, as opportunities dissipate in one area, they present themselves in another. Revealing one of the primary reasons investors must always be looking for episodes of mean reversion. Signaling when investors can follow the old dictate, 'Out with the old, in with the new."
Stay tuned...
Weekly Results
Major indices finished higher last week. The DJIA gained 0.32%. The S&P 500 rose 0.63%. The Nasdaq climbed 0.88%. 10-year Treasury bond yields rose 2.35%. And gold futures closed down 3.68%.

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